Arguably the most important bill in a weak and flaccid Queen’s Speech today is the Banking Bill. But it is a fiasco. It has one central objective – to prevent too-big-to fail banks from being bankrupted by the recklessness of their investment bankers and requiring another gargantuan bail-out at ruinous cost to taxpayers and deep and prolonged recession to the economy.
But it will fail because the retail and investment arms of banks are not being split, merely having so-called ‘Chinese walls’ erected between them – a ramshackle device that highly-paid lawyers and accountants in the City of London will take no time circumventing. But that’s not even the half of it. Of all the other reforms now so urgently needed in the banking sector, not a single one is to be found in this Bill.
It is universally agreed (except by the banks of course) that they should not again be allowed to become over-leveraged (i.e. should not increase their debt liabilities beyond prudent limits) which would obviously increase the likelihood of another crash. The capital adequacy ratio was therefore to be increased from its current 2.5% level to 4%, though some recent studies have recently suggested it should be nearer 10%. But that has now been severely watered down in two crucial respects: Osborne has succumbed to bank lobbying by reducing the target to 3% and has, incredibly, decided it will not become operative till 2019!
Everyone agrees that there needs to be rebalancing of the economy away from the City to industry and manufacturing. Nothing in the Bill will prompt this. Everyone agrees that it is crucial that lending to industry should be dramatically stepped up. Despite the manifest failure of previous efforts to do this via Operation Merlin and Funding for Lending, nothing in this Bill will facilitate this. Everyone agrees that the sheer arrogance and greed of top bankers needs to be reined in, when the Tyrie Commission report into HBOS and the Salz report into Barclays have both exposed not just avarice but also incompetence and wrongdoing on a massive scale. Yet nothing in this Bill ensures that top bankers will be properly held to account. Removing a knighthood is piffling when they still walk away retaining their ill-gotten incomes and colossal pension pots. There is no bankster clause in this Bill about custodial sentences for gross irresponsibility and mismanagement.
There is nothing in this Bill about big penalties, against individual executives as well as the banking institution itself, to deter the enormous crimes of Libor-rigging, money laundering, and mis-selling of pensions and interest rate swaps. There is nothing about restructuring the banks to secure the focus that the country really needs on regional banking, low carbon economy, small businesses, science and innovation, etc. There is nothing about removing from failed private banks the power of credit creation to restore to public control the prioritising of the nation’s investment resources where they are most needed – the revival of industry and manufacturing. This Bill is a huge opportunity monumentally missed.
I find it astonishing that these banks are not being split up.
One of the original sources of the financial bubble that came crashing down was the gradual erosion of the Glass–Steagall Act (passed in 1933 in the US ). For over half a century the Act stopped banks from doing crazy things before it was gradually watered down by regulator’s who thought they knew better.
It will probably take another 60 or 70 years before the global finance world does something equally stupid again, which is why politicians like Osborne feel they just have to pay lip service to controlling the banks. However they have a responsibility to make sure it never happens again rather than just passing the buck to future generations.